Tuesday, August 21, 2007

THE SETBACK OF GOVERNMENT OWNERSHIP

It is always a great pleasure to read the columns of Mićo Mrkaić. In yesterday's edition of Finance, Mićo practically highlighted why government ownership of property and assets fails compared to private ownership based on the ability of the owners to directly enforce private property rights to maximize the outcome and return from investment and management of the property itself. I strongly recommend everyone to read the abovecited article.

From the behavioral point of view, the efficiency of property management depends on the rate of responsibility which investors or households possess. The greater the responsibility, the greater the opportunity to maximize the value of the property or certain type of asset in the market. Household management is, of course, highly sensitive to risk and value fluctuations of property in the market, that's why households form rational expectations and adapt them when the fluctuation distort the expectations set at the margin.

It is not difficult to find out that government ownership fails in most cases. The lack of risk-taking and cost-control, the minimal responsibility for possibly negative returns from investment into particular projects, followed by the property devaluation resulted from inefficiency management and investment; are among the forefront reasons why government ownership frequently creates a loss from property value.

In the light of practical experience, it is ought for empirical facts and conclusion to be thoroughly supported by the observed evidence regarding the volatility and performance of government ownership of property relative to the maximization of return. Individuals in the market possess far more interest to protect the property and maximize the return from it than the government can. Also, government participation in the form of intervention or/and public enterprises, fails to share risk and absorb the potentials regard company performance. From this point of view, it is concisely wise and logical for post-communist countries to accomplish the privatization and avoid the loss of wealth and property through letting markets and private investors control and manage property. In fact, it's about the maximization of net value of wealth which supposedly determines the standard of living respectively.